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20081118-Citi-China_Retail Citi Investment Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest t...

20081118-Citi-China_Retail
Citi Investment Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Non-US research analysts who have prepared this report are not registered/qualified as research analysts with the NYSE and/or NASD. Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Not for distribution in the People's Republic of China, excluding the Hong Kong Special Administrative Region. 1Citigroup Global Markets Asia Citigroup Global Markets Ticker Company Rating Target Price Current Year Earnings Estimates Next Year Earnings Estimates 0493.HK GOME 1H HK$2.30 Rmb0.176 Rmb0.188 0980.HK Lianhua Supermarket 1M HK$10.40 Rmb0.562 Rmb0.648 previously 3M HK$8.60 Rmb0.433 Rmb0.488 1833.HK Intime Department Store 3H HK$2.25 Rmb0.189 Rmb0.161 previously 1H HK$10.40 Rmb0.255 Rmb0.345 3308.HK Golden Eagle Retail Group 2H HK$4.50 Rmb0.251 Rmb0.273 previously 1M HK$10.00 Rmb0.235 Rmb0.320 3368.HK Parkson Retail Group 3H HK$6.00 Rmb0.313 Rmb0.331 previously 2L HK$16.40 Rmb0.347 Rmb0.436 8277.HK Wumart 1M HK$7.60 Rmb0.290 Rmb0.360 previously 3H HK$6.70 Rmb0.277 Rmb0.341 Asia Pacific | China Retailing - Broadlines (Citi) Multi-Company 18 November 2008  49 pages China Retail Downgrading Department Stores, Upgrading Supermarkets  Department stores to continue to underperform — We are slashing estimates and target prices for China department stores as we lower our same-store sales (SSS) and margin assumptions. The consensus is still too optimistic, in our view. Supermarket operators are enjoying better earnings visibility into 09E and hence we upgrade the segment. We downgrade Parkson and Intime to Sell, and Golden Eagle to Hold; we retain Buy on Gome and upgrade Lianhua Supermarket and Wumart to Buy. We also revise the risk codes for some stocks to reflect either company-specific issues or our quant rating system.  Retail sales slower in Oct — Retail sales of major consumer goods sold at department stores slowed sharply in Oct. Lower SSS growth was also heard from listed department stores. Although on an adjusted basis the slowdown is not that alarming, the overall downtrend could be just the beginning of more disappointments from department stores.  Lower traffic, more promotions at department stores — Channel checks in Shanghai suggest lighter traffic at department stores. According to local media, a number of department stores in the prime retail area of Xujiahui reported a 10- 15% decline in sales in the weeks after the Golden Week holiday. The drop is prompting aggressive promotional activities at many stores.  Tightening the purse strings — Amid the economic slowdown and job insecurity, we expect urban income growth to fall and see urban consumers becoming more cautious on spending. No doubt the government has announced a fiscal stimulus package, but the results are unlikely to be immediate. Sandy Chen1 +86-21-2896-3878 sandy.w.chen@citi.com Ross Wei1 ross.wei@citi.com See Appendix A-1 for Analyst Certification and important disclosures. China Retail 18 November 2008 Citigroup Global Markets 2 October Retail Sales Data Point to Slowdown 3 Lighter traffic prompting more promotions 3 Tightening the purse strings 4 Downgrading department stores and upgrading supermarkets 5 Companies 8 Golden Eagle Retail Group (3308.HK) 9 Intime Department Store (Group) (1833.HK) 13 Lianhua Supermarket (0980.HK) 19 Parkson Retail Group (3368.HK) 24 Wumart (8277.HK) 30 GOME (0493.HK) 36 Appendix A-1 45 Analyst Certification 45 Contents China Retail 18 November 2008 Citigroup Global Markets 3 October 08 retail sales data show a slowdown in the major consumer goods categories sold at department stores. Cosmetics, garments, footwear and jewellery account for 70%-plus of department stores’ merchandise sales. Figure 1. October 08 Retail Sales of Key Department Store Products (Percent) 1H08 Jul 08 Aug 08 Sep 08 1Q-3Q08 Oct 08 Oct vs 1Q- 3Q08 Cosmetics 21.2 31.8 26.6 28.5 23.6 14.5% -9.1 Garments, footwear etc. 25.1 27.5 27.6 28.0 25.9% 18.7 -7.2 Jewellery 43.9 43.6 44.3 35.3 42.9% 30.6 -12.3 Source: National Statistics Bureau, CEIC Data and Citi Investment Research Figure 2. Adjusting for Golden Week Timing Effect Jan-Aug 08 Sep & Oct 08 Sep & Oct vs Jan- Aug 08 ppt 关于艾滋病ppt课件精益管理ppt下载地图下载ppt可编辑假如ppt教学课件下载triz基础知识ppt s. Cosmetics 23.0% 21.0% -2.0 Garments, footwear etc. 25.6% 22.8% -2.8 Jewellery 44.0% 32.9% -11.1 Source: National Statistics Bureau, CEIC Data and Citi Investment Research Lighter traffic prompting more promotions Channel checks at department stores in Xujiahui, Shanghai, suggest that traffic is lighter. The Shanghai Evening Post has also reported that since 6 October (after the Golden Week), four department stores — Shanghai No.6 Department Store, Huijin Department Store, Pacific Department Store and Oriental Shopping Center — in Xujiahui have seen their sales declining by 10-15% yoy. Consumers are visiting stores less frequently or are delaying purchases. The downtrend is prompting stores to launch aggressive promotional activities. Since 14 November, Pacific Department Store at Xujiahui has been offering a reduction of Rmb150 on every Rmb300 purchase and, for the first time ever, is offering an Rmb200 gift coupon on every Rmb2,000 purchase. It will start offering similar promotions at its two other stores in Shanghai. The stores at Nanjing Road East, which target mass-market consumers, are also making similar promotions. The Economic Commission of Huangpu District is calling on department stores along the Nanjing Road East Pedestrians Street and in Yuyuan Garden (both of which are under its jurisdiction) to start a ‘100-day Store Promotion’ in an attempt to stimulate a rebound in sales momentum. Since 14 November, Intime’s Wulin flagship store has been having promotional events in celebration of its 10th anniversary. Its best offer is a reduction of Rmb250 for every Rmb400 purchase. Hangzhou Mansions, a high-end department store in the neighborhood, is offering a reduction of up to Rmb280 for every Rmb400 purchase. Parkson’s management made some cautious remarks on the near-term outlook in its 3Q08 results announcement. Management sees the need to slow brand mix upgrades and to resort to aggressive promotions in stores along the coastal regions. October Retail Sales Data Point to Slowdown 10-15% yoy fall in sales at major department stores after Golden Week Promotions getting aggressive Not just in Shanghai China Retail 18 November 2008 Citigroup Global Markets 4 Tightening the purse strings In 1998 China’s GDP growth fell below 8% and nominal urban per-capita income growth declined to a low of 5.1% amid the Asian financial crisis. Retail sales of cosmetics, garments, footwear and jewellery (through retail enterprises above Rmb5m) fell 3.5% yoy, but subsequently picked up along with the recovery in urban income growth. Figure 3. Per-Capita Urban Income Growth vs. Retail Sales of Garments, Footwear, Cosmetics, Jewellery -3.5% 3.9% 10.0% 9.9% 8.8% 13.9% 21.0% 26.0% 21.3% 27.4% 27.5% 23.8% 13.0% 6.6% 12.3% 10.0% 11.2% 11.4% 12.1% 17.2% 14.7% 5.1% 7.9% 7.3% 9.2% -10% -5% 0% 5% 10% 15% 20% 25% 30% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Jan- Aug 2008 Sep- Oct 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% Nominal urban per capita income growth (RHS) Nominal retail sales growth of garment, footwear, cosmetics and jewellery (LHS) Source: CEIC Data and Citi Investment Research Amid the economic slowdown and job insecurity, we expect urban income growth to fall and see urban consumers becoming more cautious on spending. No doubt the government has announced a fiscal stimulus package, but the results are unlikely to be immediate. The latest private-car licence plate auction for November held in Shanghai recorded a 27% mom (55% yoy) decline in the average successful bidding price — the largest decline since the government revised bidding rules at the start of the year. This is yet another piece of anecdotal evidence of a more cautious consumer sentiment. 1998: Cosmetic, garment, footwear and jewellery sales declined by 3.5% yoy as income growth fell to a low Price of Shanghai private-car licence plate down 27% mom and 55% yoy China Retail 18 November 2008 Citigroup Global Markets 5 Figure 4. Average Successful Bidding Prices: Shanghai Private Car Licence Plate Auction 0 10,000 20,000 30,000 40,000 50,000 60,000 Ja n- 05 Ap r- 05 Ju l-0 5 Oc t- 05 Ja n- 06 Ap r- 06 Ju l-0 6 Oc t- 06 Ja n- 07 Ap r- 07 Ju l-0 7 Oc t- 07 Ja n- 08 Ap r- 08 Ju l-0 8 Oc t- 08 Rmb Change in bidding rule implemented Source: Shanghai International Merchandise Auction Co. and Citi Investment Research Downgrading department stores and upgrading supermarkets We are slashing our estimates for China department stores as we lower same-store sales (SSS) and margin assumptions. The consensus is still too optimistic, in our view. We downgrade Parkson and Intime to Sell, and Golden Eagle to Hold. Figure 5. CIR vs. Consensus Net Profit for Department Stores Consensus Net Profit (Rmb m) CIR Reported Net Profit (Rmb m) Difference from Consensus Price (HK$) CIR Rating 08E 09E 08E 09E 08E 09E Parkson 3368.HK 6.30 3H 924 1,179 875 927 -5% -21% Golden Eagle 3308.HK 3.90 2H 563 633 584 496 4% -22% Intime 1833.HK 2.18 3H 498 545 433 290 -13% -47% Source: Bloomberg and Citi Investment Research estimates Despite supermarket operators’ outperformance year to date, we upgrade Lianhua Supermarket and Wumart to Buy on reasonably good earnings visibility going into 09E and their defensive nature. China Retail 18 November 2008 Citigroup Global Markets 6 Figure 6. Snapshot of Target Price and Valuation Method Changes RIC Target Price (HK$) Earnings Revisions (%) Valuation Methods New Old 08E 09E New Old Parkson 3368.HK 6.00 16.40 -10 -24 Trough PER (12.6x) and DCF (Cost of Equity at 15%, terminal growth at 2%) PEG of 1x and DCF (Cost of Equity at 11.3%, terminal growth at 5%) Golden Eagle 3308.HK 4.50 10.00 -2 -22 Trough PER (13.3x) and DCF (Cost of Equity at 15%, terminal growth at 2%) DCF (Cost of Equity at 11.9%, terminal growth at 5%) Intime 1833.HK 2.25 10.40 -26 -53 Trough PER (8.8x) and SOTP (Cost of Equity at 17.1%, terminal growth at 2%) SOTP (Cost of Equity at 12.9%, terminal growth of 5%) Lianhua Supermarket 980.HK 10.40 8.60 30 33 Trough PER (12x), EV/EBITDA (4.4x), Carrefour JV (PER of 14x) EV/EBITDA (7x), PER (18x) Wumart 8277.HK 7.60 6.70 5 6 PER (19x, mean-1SD) and EV/EBITDA (9x, mean-1SD) SOTP and PEG (0.9x) Source: Citi Investment Research estimates Given the slowing economy into 09E, we are revising our valuation methodologies to incorporate trough valuations. C hina R etail 18 N ovem ber 2008 C itigroup G lobal M arkets 7 Figure 7. China Retail — Valuation Comparison Company Reuters Rating Price TP Price Mkt Cap P/E (x) P/B (x) EV/EBITDA (x) EPS Growth (%) Yield (%) 17-Nov-08 Code Cur Local Local US$mn CY07 CY08E CY09E CY07 CY08E CY09E CY07 CY08E CY09E CY07 CY08E CY09E CY07 CY08E CY09E China Retail Anta 2020.HK 1M HKD 3.80 3.10 996 12.8 8.2 7.5 1.6 1.5 1.3 8.4 4.1 3.5 161 56 10 1.9 4.9 5.4 Belle 1880.HK 3L HKD 5.70 3.16 3,439 11.1 10.3 8.1 2.0 1.7 1.5 9.7 6.9 5.5 70 8 27 2.3 2.9 3.7 China Dongxiang 3818.HK 2H HKD 2.25 2.30 1,681 15.7 12.0 11.0 2.0 1.7 1.6 10.0 4.8 4.1 139 31 9 0.5 3.3 3.7 China Hongxing CHXS.SI 3H SGD 0.17 0.21 351 6.3 5.4 6.0 0.7 0.6 0.6 -0.2 1.7 1.8 66 18 -10 4.3 5.1 4.2 China Sports CSIL.SI 3H SGD 0.14 0.15 67 2.9 2.3 3.5 0.7 0.6 0.5 0.4 1.0 1.7 48 26 -33 6.9 8.6 5.7 Golden Eagle 3308.HK 2H HKD 4.50 3.90 915 21.4 13.7 12.6 5.0 3.6 2.9 10.8 7.5 4.9 18 57 9 1.3 1.9 2.4 GOME Electrical 0493.HK 1H HKD 2.30 1.40 2,305 10.0 7.0 6.6 1.6 1.7 1.5 6.2 5.4 4.3 57 43 7 3.6 4.3 4.6 Intime Department Store 1833.HK 3H HKD 2.25 2.18 506 12.3 10.2 11.9 0.9 0.9 0.8 6.1 4.7 3.0 12 21 -15 3.3 3.8 2.5 Li Ning 2331.HK 3M HKD 9.50 10.28 1,380 20.1 13.3 11.5 6.0 4.9 4.0 14.3 8.2 6.9 61 51 15 2.5 3.8 4.5 Lianhua Supermarket 0980.HK 1M HKD 10.40 8.65 694 17.7 13.5 11.8 2.2 2.0 1.8 3.1 2.9 2.7 11 30 15 2.4 2.6 2.6 Parkson 3368.HK 3H HKD 6.00 6.30 2,266 22.9 17.7 16.7 6.3 5.1 4.4 13.9 8.9 6.6 45 29 6 2.2 2.8 2.9 Prime Success 0210.HK 1L HKD 6.30 1.78 376 7.6 5.8 4.4 2.1 1.6 1.3 4.7 3.5 2.5 32 31 31 2.8 3.5 4.5 Wumart Stores Inc. 8277.HK 1M HKD 7.60 5.76 907 23.7 17.5 14.1 2.9 2.5 2.3 11.0 7.9 6.4 30 36 24 2.6 2.3 2.8 Mkt Cap Wght Avg. Aggregate 15,884 15.4 11.7 10.4 3.0 2.6 2.2 9.5 6.3 5.0 66 32 13 2.3 3.3 3.7 Simple Avg. 14.2 10.5 9.7 2.6 2.2 1.9 7.6 5.2 4.2 58 34 7 2.8 3.8 3.8 Source: Company and Citi Investment Research estimates Figure 8. China Retail — Profitability Comparisons Company Reuters Rating Price TP Price Mkt Cap EBITDA Margin (%) EBIT Margin (%) Net Margin (%) ROE (%) 17-Nov-08 Code Cur Local Local US$mn CY07 CY08E CY09E CY07 CY08E CY09E CY07 CY08E CY09E CY07 CY08E CY09E China Retail Anta 2020.HK 1M HKD 3.80 3.10 996 15.8 19.1 18.9 14.9 18.1 17.6 16.9 18.1 17.1 24.2 18.9 18.5 Belle 1880.HK 3L HKD 5.70 3.16 3,439 18.4 17.3 16.1 15.0 14.0 13.7 17.0 12.2 12.0 27.1 17.8 19.5 China Dongxiang 3818.HK 2H HKD 2.25 2.30 1,681 42.2 38.7 36.2 41.2 36.4 33.7 42.9 36.2 29.5 23.6 15.3 15.1 China Hongxing CHXS.SI 3H SGD 0.17 0.21 351 24.7 21.4 19.7 23.0 19.5 17.2 20.4 16.9 15.3 19.3 13.1 10.4 China Sports CSIL.SI 3H SGD 0.14 0.15 67 17.8 14.2 12.0 17.5 13.8 10.8 12.8 11.1 9.7 46.6 28.5 16.0 Golden Eagle 3308.HK 2H HKD 4.50 3.90 915 52.6 53.5 52.0 47.6 48.8 46.8 34.8 42.0 33.2 32.4 39.4 43.5 GOME Electrical 0493.HK 1H HKD 2.30 1.40 2,305 5.5 6.1 6.1 4.9 5.4 5.3 2.7 4.5 4.5 21.7 23.6 24.3 Intime Department Store 1833.HK 3H HKD 2.25 2.18 506 44.6 44.0 39.8 40.0 34.3 29.0 42.8 36.3 20.0 14.7 11.5 14.2 Li Ning 2331.HK 3M HKD 9.50 10.28 1,380 15.6 15.5 15.2 13.9 14.2 14.0 10.9 10.4 10.2 32.8 40.9 38.7 Lianhua Supermarket 0980.HK 1M HKD 10.40 8.65 694 2.6 4.2 4.2 (0.1) 1.9 2.0 1.5 1.6 1.7 13.5 11.8 12.3 Parkson 3368.HK 3H HKD 6.00 6.30 2,266 36.9 36.9 34.9 33.2 33.4 31.4 22.1 23.9 22.4 30.1 37.2 38.7 Prime Success 0210.HK 1L HKD 6.30 1.78 376 16.4 16.3 17.1 13.9 13.8 14.5 10.0 10.0 10.6 32.7 32.0 32.4 Wumart Stores Inc. 8277.HK 1M HKD 7.60 5.76 907 6.9 7.5 7.6 5.2 5.7 6.0 4.2 5.8 4.2 14.4 15.3 16.9 Mkt Cap Wght Avg. Aggregate 15,884 22.8 22.6 21.5 20.4 19.9 18.9 18.2 17.2 15.0 25.3 24.1 24.9 Simple Avg. 23.1 22.7 21.5 20.8 19.9 18.6 18.4 17.6 14.6 25.6 23.5 23.1 Source: Company and Citi Investment Research estimates China Retail 18 November 2008 Citigroup Global Markets 8 Companies China Retail 18 November 2008 Citigroup Global Markets 9 Golden Eagle Retail Group (3308.HK) Downgrade to Hold: Slower Momentum and Risky Acquisition  Lowering target price to HK$4.50 — We are cutting core net profit forecasts by 2% for 08E and 22% for 09E as we lower same-store sales growth for the two years. Our new target price is the average of our DCF valuation and the trough P/E of 13x on 09E. Upside potential is 17%, but with our risk rating now High, we downgrade the stock to Hold. However, the company’s controlled pace of expansion, strong balance sheet and high property ownership should make it less sensitive to revenue declines.  SSS growth slower in October — Overall SSS growth stood at 15% in October, a slowdown from 28% in 1H08. The Nanjing flagship store saw SSS growth declining to high single digit rates, while stores in Yangzhou, Suzhou and Xuzhou saw SSS growth slowing to 15-20%. The company is making adjustments to brand mix at each store depending on market conditions.  CB holders’ put option likely to be exercised in Oct 09 — Its CB holders have an option to redeem the HK$1bn CB (convertible at HK$6.42, maturing Oct 2011) in October 09 at a 15.8% premium. We now assume that the put option will be exercised in 09. Even with the early redemption, we expect the company to remain in a net cash position.  Proposal to acquire parent’s Shanghai store is a risk — The Shanghai store has been loss-making and will be closed until April for remodeling. The proposed sum is around Rmb1bn, with an upfront cash outlay of Rmb360m and assumption of an Rmb638m loan. The timing of the acquisition is not good, in our view. We therefore rate the stock High Risk. Company Focus Hold/High Risk 2H from Buy/Medium Risk Price (17 Nov 08) HK$3.90 Target price HK$4.50 from HK$10.00 Expected share price return 15.4% Expected dividend yield 1.9% Expected total return 17.3% Market Cap HK$7,090M US$915M Price Performance (RIC: 3308.HK, BB: 3308 HK) Statistical Abstract Year to Net Profit Diluted EPS EPS growth P/E P/B ROE Yield 31 Dec (RmbM) (Rmb) (%) (x) (x) (%) (%) 2006A 247 0.136 1.4 25.3 6.9 38.7 1.8 2007A 292 0.160 18.2 21.4 5.0 27.0 1.3 2008E 457 0.251 56.5 13.7 3.6 30.6 1.9 2009E 496 0.273 8.6 12.6 2.9 25.6 2.4 2010E 601 0.331 21.3 10.4 2.4 25.5 2.9 Source: Powered by dataCentral Change in opinion  Rating change  Target price change  Estimate change  China Retail 18 November 2008 Citigroup Global Markets 10 Lowering core earnings forecasts We are cutting our core net profit and basic core EPS forecasts by 2% and 22% for 08E and 09E as we lower same-store sales growth for the two years. We are now modeling 3% growth for 09E (down from 19%). Factoring in non-core items, including gains on investment, forex gains on CB and fair value gain on derivative components of CB, we expect reported net profit to go up by 26% for 08E. Based on our revised forecasts, we expect core earnings growth to fall to 9% in 09E before recovering to 21% in 10E. Figure 9. Earnings Revisions for 08E and 09E 08E 09E 10E Same-store sales growth New 19% 3% 8% Old 20% 19% - Reported Net Profit New 584 496 601 Old 464 632 - Change 25.7% -21.6% - Core Net Profit New 457 496 601 Old 464 632 - Change -1.7% -21.6% - Basic Core EPS New 0.25 0.27 0.33 Old 0.26 0.35 - Change -1.7% -21.6% - FD Core EPS (adjusted for CB dilution on assumption that CB will be redeemed in 09) New 0.25 0.27 0.33 Old 0.24 0.32 - Change 6.7% -14.9% - Source: Citi Investment Research estimates SSS growth slower in October Overall SSS growth stood at 15% in October, a slowdown from 28% in 1H08. The Nanjing flagship store saw SSS growth down to a high single digit, while stores in Yangzhou, Suzhou and Xuzhou reported a SSS growth decline to 15- 20%. Golden Eagle is making adjustments to its brand mix at each store depending on market conditions. Given the macro headwinds, we are cutting our SSS growth assumption more aggressively for 09E to 8% from 19%. CB holders’ put option likely to be exercised in Oct 09 Golden Eagle has HK$1bn CB outstanding, convertible at HK$6.42, maturing in Oct 2011 and redeemable at a 27.7% premium. The CB holders have an option to redeem the CB in October 09 at a 15.8% premium. We now assume that t
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